Tax Law Design & Drafting

Description

This book examines the development of tax legislation from a comparative law perspective, an area in which very little of a general nature has previously been written. Based on the experience of the IMF Legal Department in assisting many developing and transition countries to draft tax legislation, it comprises contributions by tax experts from around the world. This useful guide aims to identify the legal issues that arise in the drafting of tax laws and to examine the various solutions which have been devised in national legislation. A comparative tax law bibliography and a bibliography of the national tax laws of IMF member countries are included in appendix. Its practical nature and the general scope of its discussion will make it a valuable tool not only for officials in developing and transition countries and their advisors, but also for students, academics and practitioners with an interest in comparative tax law. A two-volume paperback edition of this work was published by the IMF in 1996 and 1998. Cover Contents Volume 1 1. Tax Legislative Process I. Institutionalizing the Tax Reform Process A. In General B. Identifying the Problems to Be Addressed by Legislation and Establishing the Pace of Reform C. Research Support 1. Estimating Revenue 2. Surveys of Current Practice 3. Comparative Law II. Interdisciplinary Nature of Taxation III. Communication and Collaboration in the Tax Reform Process B. Consultation with Other Government Experts C. Consideration of Related Tax Issues by Different Working Groups D. Consultations with Parliament E. Consultations with the Private Sector F. Responsibility for Process of Tax Legislation IV. Drafting Process V. Special Considerations in Using Foreign Legal Advisors 2. Legal Framework for Taxation I. Legal Foundation; Power to Make Tax Laws II. General Principles and Limitations on Power to Make Tax Laws A. Principle of Equality B. Principle of Fair Play or Public Trust in Tax Administration C. Principles of Proportionality and Ability to Pay D. Principle of Nonretroactivity E. Other Constitutional Limitations F. Charters of Taxpayer Rights G. International Agreements III. Interpretation of Tax Laws A. General Considerations B. France C. Belgium D. Germany E. The Netherlands F. United Kingdom G. Australia H. United States I. Antiabuse Legislation J. Specific Antiabuse Provisions K. Conclusion IV. Distribution of Tax Law Making Power Between the Legislative and the Executive Branches of Government A. Distinction Between Executive and Legislative Functions of Government B. Delegation of Power to Make Tax Laws in the Continental European Tradition C. Delegation of Tax Law Making Powers in Common Law Countries D. Administrative Commentaries, Interpretations, and Statements of Practice E. Administrative Rulings V. Division of Tax Powers Between the Central and Local Governments A. Classification of Tax Powers B. Leading Principles in the Distribution of Tax Power 1. Federal vs. a Centralized State 2. Economic and Monetary Union in a Federal State 3. Relation Between Revenue and Expenditure 4. Distribution of Tax Law Making Power with Respect to Certain Elements of the Tax 5. Distribution of Tax Law Making Power According to the Level of Implementation of the Tax 6. Deduction or Credit for Regional and Local Taxes 7. Distribution of Tax Law Making Powers in a Centralized State 8. Distribution of Tax Law Making Power in a Federal State 3. Drafting Tax Legislation I. Introduction II. Understandability B. Transparency C. Avoiding Legalistic Language D. Numbering of Sections11 E. Section Headings F. Sentence Structure G. Plain English Drafting 1. In general 2. Use of “shall” 3. Use of active voice 4. Use of the singular 5. Provisos 6. Use of “includes” Example: 7. Use of “any” 8. “Where” and “if” Example: 9. Latin phrases 10. “Described in” 11. “Deemed” 12. Punctuation 13. Parenthetical H. Innovations in Format 1. In general 2. Footnotes 3. Examples and notes 4. Tables and graphics 5. Definitions III. Organization B. Use of Code C. Organization of Tax Laws in the Absence of a Code IV. Effectiveness A. Relation between Policy and Drafting B. Anticipating Application and Interpretation C. Drafting for a Judicial Audience D. Relation between Statute, Regulations, and Other Explanatory Material V. Integration A. Local Drafting Style B. Gender-Neutral Language C. Relation between Tax Law and Other Legislation D. Specific Problems of Terminology 1. Legal Person 2. Employee 3. Property E. Use of Models Appendix A: Some Drafting Tips 4. Law of Tax Administration and Procedure I. Structure of Tax Administration Law A. Organizing Principles of Tax Administration Law 1. Functional Categories 2. Temporal Organization 3. Legal Categories B. Interrelation of Tax Administration Law with Other Laws 1. Nontax Law 2. Substantive Tax Law 3. Location of Tax Administration Law II. Matters to Be Included in a Tax Administration Law A. Compilation and Publication of All Tax Laws B. Definitions of General Applicability C. Regulations and Rulings 1. Regulations and Rulings of General Applicability 2. Rulings of Specific Application D. Returns and Record Keeping 1. Returns 2. Information Returns 3. Conditioning a Tax Benefit on Identification of the Payee 4. Record Keeping E. Audits and Investigations 1. Relationship between the Taxation Authority and Investigative Agencies 2. Access to Third-Party Records and the Power to Issue Summonses 3. Indirect Methods of Assessment F. Dispute Settlement 1. Compromises 2. Payment of Tax During Dispute 3. Disputes Within the Taxation Authority 4. Tax Adjudications 5. Procedures in Tax Adjudications 6. Burden of Proof in Tax Adjudications G. Recovery 1. Tax Liens 2. Seizure of Property 3. Sale of Seized Property 4. Recovery of Debts Owed the Taxpayer by Third Parties 5. Installment Payment Arrangements 6. Receivership 7. Property Transferred Without Full Consideration 8. Compromise and Write-Offs H. Internal Investigations I. Taxpayer Ombudsperson J. Interest K. Taxpayer Rights 1. Confidentiality 2. Notice 3. Reasonable Audits 4. Explanation 5. Counsel 6. Record 7. Discovery 8. Hearing 9. Appeal 10. Limitations III. Taxpayer Compliance and Sanctions A. Existing Research into Compliance Issues B. Design of the Substantive Tax Law C. Sanctions 1. Purpose of Sanctions 2. Operation of Deterrence 3. Design of Civil Sanctions 4. Severity of Civil Sanctions 5. Rules to Increase the Effectiveness of Civil Sanctions 6. Criminal Offenses by Taxpayers 7. Tax Administrator Penalties 5. Regulation of Tax Professionals I. Basic Policy Considerations in Regulating Tax Advisors A. Balance of Supply and Demand B. Maintenance of Quality Standards C. Conflicting Loyalties of Tax Advisors D. Relationship Between Tax Consulting and the Legal and Accounting Professions E. Admission of Legal Persons to the Profession F. Regulation of International Tax Consulting Services G. Provision of Tax Services by Employees H. Privileged Communications and Work Product II. Tailoring Regulation to Functions of Tax Advisors A. Tax Planning B. Advice Ancillary to Financial and Other Services C. Preparation and Auditing of Commercial Accounts D. Preparation of Tax Returns E. Representation of Taxpayer Before the Tax Administration F. Representation Before the Courts III. Approaches to Regulation A. Full Regulation: the German Model B. Partial Regulation: the U.S. Model C. The Model of No Regulation D. Issues in Regulation of Tax Consultancy E. Penalties for Practitioners IV. Legal Consequences of Using Advisors A. Returns B. Liability for a Tax Advisor's Mistakes C. Facilities for Taxpayers' Use of Tax Advisors Appendix A. Organization of Tax Profession in Different Countries66 Tax Professionals in Selected Countries 6. Value-Added Tax I. Introduction A. Adoption of VAT B. Terminology C. Economic Scope D. Territorial Scope E. Internal Charge to VAT F. Approach to Charging VAT on Imports G. Principle of Nondiscrimination II. Taxable Persons A. Persons Within the Scope of the Law B. Excluding Persons with Low Levels of Business Activity C. A VAT Register D. VAT Numbers E. Voluntary Registration F. Exporters and Persons Engaged in International Activities G. Effect of Nonregistration H. Cancellation of Registration J. Continuing a Registration Despite a Change in the Taxable Person III. Supplies of Goods and Services A. Transactions within the Scope of the Law B. Supplies of Goods C. Land D. Supplies of Services E. Supplies by Employees and Officeholders F. Supplies by Agents G. Mixed Supplies and Multiple Supplies H. When a Supply of Goods Takes Place J. When a Supply of Services Takes Place K. Where a Supply of Goods Takes Place L. Where a Supply of Services Takes Place M. Treatment of Imports IV. Taxable Supplies A. Definition B. Economic Activities C. Payment for a Supply D. Transactions Where No Payment Is Payable E. Supplies Where Payment Is Not Full V. Exempt Supplies A. General Comments B. Effect of Exemptions C. Specific Exemptions: Internal Supplies 1. Land and Buildings 2. Supplies by Nonprofit Organizations and Individuals 3. Financial Services D. Using Alternative Taxes E. Exemption of Diplomatic Activities F. Exempt Imports G. Problems Caused by Exempt Supplies VI. Taxable Value of Supplies A. Charge to VAT B. Value of Internal Supplies C. Tax Inclusive vs. Exclusive Base D. Fair Market Value of Supply E. Adjustments and Rebates F. Value of Imports VII. Payment of VAT A. Determining the Amount to Be Paid B. Rates of VAT C. Zero Rate D. Zero Rating Exports and International Supplies E. Should Internal Supplies Be Zero Rated? F. Paying VAT to the Tax Authorities G. Entitlement to Credit for Input Tax145 H. Partial Exemption I. Disallowed Input Tax J. Capital Goods K. Safeguarding the Revenue L. Bad Debts VIII. Procedure and Administration A. Need for Specific VAT Rules B. Combining VAT and Customs Administration on Imports C. Handling VAT on Internal Supplies D. Regulations, Instructions, and Guidance E. VAT Invoices F. VAT Returns G. Payment of VAT H. Assessing VAT I. VAT Periods J. Repayment of Excess VAT Credit IX. Special Cases 7. VAT Treatment of Immovable Property I. Introduction II. Nature of the VAT A. Activities or Expenditures? B. Flows or Stocks? III. How Immovable Property Should be Taxed A. An Economic Point of View B A Legal Point of View C. Practical Solutions IV. How Immovable Property Is Taxed A. Construction B. Lease C. Sale V. Conclusion 8. Excises I. Introduction A. Nature of Excise Taxes B. Terminology C. Territoriality D. Method of Charging E. Principle of Nondiscrimination II. General Design Issues A. General Provisions B. Taxable Event and Chargeability C. Movement of Goods D. Payment of the Duty E. Reimbursement F. Exemptions III. Issues in Designing Specific Taxes A. Mineral Oils B. Alcohol and Alcoholic Beverages C. Tobacco D. Others 9. Tax on Land and Buildings I. Introduction A. Why a Property Tax? 1. Local Government Finance 2. Defining the Public Claim on Property Value 3. Inelastic Tax Base 4. Equity Arguments B. Drafting Issues C. Terminology II. Legal Issues in Defining the Tax Base A. Types of Property Subject to Tax B. Measure of the Tax Base 1. Market Value as a Tax Base 2. Capital Value and Annual Value 3. Income-Based Valuation 4. Area-Based Taxation 5. Acquisition Value 6. Other Tax Bases C. Special Assessments and Betterment Levies D. Market Value Taxation in Developing Economies F. Defining the Unit G. Exemptions III. Property Rights and Valuation A. What Is "Ownership"? B. Property Rights and Tax Liability C. Valuation of Land and Buildings IV. Legal Issues in Setting the Tax Rate A. Use of Assessment Ratios B. Responsibility for Setting Tax Rates V. Administrative Issues A. Assignment of Responsibility B. Enforcement and Liens C. Revaluation Cycles VI. Checklist of Issues for Legislative Drafting A. Scope of the Tax B. Identification of the Taxpayer C. Exemptions D. Concessions and Preferential Assessments E. Measurement of the Tax Base F. Setting the Tax Rate G. Intergovernmental Issues H. Procedural Issues I. Collection and Enforcement 10. Taxation of Wealth I. Introduction Table 1. Wealth Taxes A. Tax Capacity 1. Wealth Taxes in General 2. Wealth Transfer Taxes B. Social, Moral, and Political Justifications 1. Wealth Taxes in General 2. Wealth Transfer Taxes C. Economic Efficiency 1. Wealth Taxes in General 2. Wealth Transfer Taxes D. Problems of Administration 1. Net Wealth Taxes 2. Wealth Transfer Taxes E. Conclusion II. Issues in the Design of Periodic Net Wealth Taxes A. Taxpayers 1. Physical Persons and Residence 2. Entities and Resident and Nonresident Owners 3. Exemptions 4. Implications for Drafting B. Tax Base 1. Base for Residents and Nonresidents 2. Exemptions 3. Valuation C. Double Taxation D. Administration III. Design of Wealth Transfer Taxes A. Taxable Transfer and Taxpayer B. Tax Base C. Double Taxation D. Deductions E. Exclusions F. Valuation G. Rate Schedule and Exempt Amount H. Administration I. Gift Tax 1. Inclusion of Certain Gifts in Taxable Estate 2. Definition of Gift 3. When Gift Is Complete 4. Jurisdictional Issues 5. Integration with Estate, Inheritance, or Accessions Regimes 6. Exemptions 11. Social Security Taxation I. Introduction A. What Is Social Security? B. Are Social Security Payments Taxes? C. Is the Legislation for Contributions Tax Legislation? D. What Are the Forms of Social Security Tax? E. Links Between Contributions and Benefits II. Issues in Social Security Taxation for Employees A. General Terms B. What Is Employment? C. Independent Workers: Are They Employees? D. What of Officeholders? E. What Categories of Employees May Be Excluded? 1. Age-Based Exclusions 2. Education and Training 3. Voluntary and Nonremunerated Workers 4. Recipients of Benefits 5. Specific Employments 6. Employment Within the Family 7. Jurisdictional Exclusions F. Who Are Employers? G. Allocating Contributions between Employer and Employee H. Should the State Contribute? I. Basis of Contribution Liability 1. Gender Discrimination 2. Earnings-Related Contribution Rates 3. Earnings Bands J. What Are Earnings? 1. Links with Income Tax 2. Reaching Settlements 3. Benefits in Kind 4. Specific Expenses and Allowances 5. Practical Effects K. How Should Rates of Contribution Be Determined? L. Earnings Periods 1. The Income Tax Year 2. Separate Earning Periods M. Multiple Employments N. What Records Are Necessary? III. Issues for the Self-Employed A. What Is Self-Employment? B. What Is the Income of the Self-Employed? C. How Is Contribution Liability of the Self-Employed Based? D. What Records Are Necessary? IV. International Aspects A. What Limits Do Schemes Impose? B. What Jurisdictional Rules Are Used? 1. Nationally Determined Limits 2. Specific Problems 3. Migrant Workers 4. Rules for Employers 5. Rules for the Self-Employed C. Rules in the European Economic Area D. What Other Treaty Rules Exist? V. Interaction of Income Tax and Social Security Schemes A. General Principles B. Interactions Between Contributions and Income Tax 1. Rules for Deductibility 2. Measurement and Timing Issues 3. Treatment of Employer's Contributions 4. Treatment of the Self-Employed C. Should Benefits Be Subject to Tax and Contributions? 1. Making Benefits Subject to Contributions 2. Notional Contributions 3. Imposing Income Tax on Benefits D. Implicit Tax Rates on Benefit Programs E. Can High Implicit Tax Rates Be Avoided? VI. Conclusion 12. Presumptive Taxation I. General Concepts II. Legal Characteristics of Presumptive Methods A. Rebuttable vs. Irrebuttable B. Minimum Tax vs. Exclusive C. Mechanical vs. Discretionary D. Scope of Application E. Taxpayers Targeted III. Particular Presumptive Methods A. Reconstruction of Income 1. In General 2. Net Worth Method 3. Bank Deposit Method 4. Expenditures Method B. Percentage of Gross Receipts C. Percentage of Assets 1. Gross or Net Assets? 2. Who Is the Taxpayer? 3. Tax Rate 4. Tax Base 5. Exceptions for Nonproductive Periods 6. Relation Between Assets Tax and Income Tax 7. Foreign Tax Credit 8. Valuation 9. Exemptions 10. Tax Planning 11. Assets Tax with Partial Scope D. Industry-Specific Methods for Small Businesses 1. Fixed Amounts Based on Profession or Trade 2. Contractual Method 3. Methods Based on Turnover 4. Standard Assessment Guides 5. Taxation of Agriculture67 E. "Outward Signs" of Lifestyle F. Conclusion Appendix A. Lesotho Provision on Outward Signs of Lifestyle84 13. Adjusting Taxes for Inflation I. Effects of Inflation on Tax Liability—in General A. Erosion of Statutory Amounts Expressed in National Currency B. Erosion of Tax Obligations C. Measurement of Tax Base D. Reason for Categorization II. Adjustment of Taxes Other Than Income Tax III. Adjustment of Income Tax B. Ad Hoc Adjustment C. Partial Adjustment D. Global Adjustment 1. General Issues 2. Global Adjustment in the Context of the Net Worth Method 3. Alternative Approaches 4. Equivalence Between Net Worth Calculation and Accounting in Constant Currency 5. Determination of Specific Types of Income Table 1. Constant Currency Accounting 6. Limitations on Expenses E. Inflation Adjustment of Nonbusiness Income of Individuals F. Collection of Tax G. Foreign Currency Translation IV. Conclusion Appendix A. Global Adjustment Method in Detail General Rules for Determining Taxable Business Income Article 1. General rules for determining taxable business income Article 2. Valuation of assets and debts in closing balance Article 3. Valuation of inventories and unfinished products Comments on Articles 2 and 3 Examples Appendix B. Summary Adjustment of Opening Net Worth Adjustment of Increases in Net Worth Adjustment of Decreases in Net Worth Adjustment of Items in Closing Balance Volume 2 14. Individual Income Tax I. Introduction II. General Design A. Schedular Versus Global Income Taxes B. Single or Separate Tax Laws C. Charging Provision and Basic Terminology III. Taxable Income A. Gross Income B. Exempt Income C. Deductions D. General Principles 1. Apportionment 2. Recouped Deductions 3. Valuation IV. Employment Income A. Definition of Employment and Employment Income B. Employee Expenses C. Employee Fringe Benefits 1. Introduction 2. Choice of Tax Method 3. Identification, Valuation, and Exclusions V. Business and Investment Income VI. Miscellaneous Receipts A. Windfalls B. Gifts C. Scholarships D. Damages E. Social Welfare and Analogous Benefits and Expenses F. Loans and Cancellation of Indebtedness G. Imputed Income from Owner-Occupied Housing H. Illegal Income VII. Tax Relief for Personal Expenses VIII. Timing Issues A. Tax Period B. Persons Entering and Exiting the Tax System C. Method of Accounting IX. The Taxpayer A. Terminology B. Individual, Spousal, or Family Units C. Divorced and Separated Persons D. Recognition of Support for Dependents X. Income Tax Rate Scale A. Progressive and Flat-Rate Scales B. Income Averaging and Antibunching Rules 1. Income Averaging 2. Antibunching Rules C. Income Shifting XI. Tax Offsets XII. Administrative Aspects of Taxing Employment Income A. Deductible Expenses B. Personal Reliefs C. Multiple Employment and Changes in Employee Status D. Fringe Benefits E. Other Income Sources 15. The Pay-As-You-Earn Tax on Wages I. Introduction A. Revenue Importance of the PAYE B. Limited Use of Administrative Resources C. Reduction in Return Filing D. Other Withholding Taxes II. PAYE Calculation Methods III. Finality of PAYE A. Preliminary PAYE B. Semifinal PAYE C. Final PAYE IV. Administrative Burden V. Social Security Contributions VI. Administrative Constraints of Developing and Transition Countries VII. Impact of Inflation on Withholding VIII. Withholding Systems: Country Examples IX. The PAYE Recommended for Developing and Transition Countries A. Simple PAYE B. PAYE and a Comprehensive Income Tax C. The PAYE and a Schedular Income Tax Appendix. Description of National PAYE Systems Industrial Countries Netherlands United Kingdom43 United States Developing and Transition Countries Chile Hungary Indonesia Kenya Philippines Russia 16. Taxation of Income from Business and Investment I. Introduction II. Business Income A. Definition of Business B. Definition of Business Income 1. Financial Accounting and Business Income Taxation 2. Specific Inclusions C. Deduction of Business Expenses 1. Personal Expenses 2. Capital Expenses 3. Policy-Motivated Restrictions III. Investment Income A. Annuities B. Interest C. Royalties D. Rent IV. Issues of Tax Accounting A. The Tax Period 1. Annual Measurement of Taxable Income 2. Loss Carryovers B. General Timing Issues in the Recognition of Income and Deductions 1. Method of Accounting 2. Currency Translation Rules 3. Claim of Right 4. Price Uncertainty 5. Foreign Currency Exchange Gains and Losses 6. Bad Debts C. Timing Issues in the Recognition of Income 1. Income Subject to Potential Claims or Charges 2. Installment Sales 3. Long-Term Contracts Example Example D. Timing Issues in the Recognition of Expenses 1. Economic Performance and Recognition of Expenses 2. Accruing Liabilities 3. Repairs and Improvements 4. Inventory 5. Research and Development V. Issues Relating to the Taxation of Assets A. Timing Rules for Realization of Gain or Loss B. Cost Base C. Consideration Received D. Non-Arm's-Length Transfers E. Nonrecognition Rules 1. Changes in the Tax Status of Assets 2. Disposals Intended to Trigger a Loss 3. Involuntary Disposals Example 4. Spousal Transfers F. Transitional Basis for Assets Previously Outside the Tax Base VI. Special Regimes A. Interest Income and Expenses 1. Inflation Benefits 2. Thin Capitalization 3. Interest Quarantining B. Finance Leases C. Capital Gains D. Farming Income E Non–Life Insurance Companies 1. Income-Recognition Rules 2. Deduction-Recognition Rules 3. Contingency Reserves VII. Administrative Aspects of Taxing Business and Investment Income A. Advance Payments of Tax B. Withholding C. Withholding on Income from Capital Appendix. Relation Between Tax and Financial Accounting Rules A. Introduction B. Evolution of Commercial Accounting Rules C. Current Practice 1. Overview 2. Germany 3. France 4. United States 5. Canada 6. Transition Countries D. Choice Among Different Approaches 17. Depreciation, Amortization, and Depletion I. Introduction II. Definition of Depreciable Property A. Categories of Property B. Property the Cost of which Cannot Be Deducted in One Year C. Property Held to Generate Current Taxable Income D. Wear, Tear, Obsolescence, and Useful Life E. Exclusions of Particular Property 1. Land 2. Goodwill 3. Inventory 4. Property the Costs of Which Have Already Been Accounted For III. Depreciation Rates and Methods A. Economic Depreciation Example Table 1. Depreciation of Asset Yielding Constant Income B. Straight Line and Accelerated Depreciation C. Declining-Balance Depreciation D. Depletion E. Transfer of Property F. Partial Years G. Pooling 18. International Aspects of Income Tax I. Introduction II. The International Dimension of Taxation A. Importance of International Taxation B. The Challenge for International Taxation C. Consensus on International Tax Rules III. Tax Treaties A. Structure of Tax Treaties B. Purpose of Tax Treaties C. Relationship of Tax Treaties and Domestic Law IV. Definition of Residence A. Individuals B. Legal Entities V. Definition of Source of Income A. Geographical Extent of Country B. Structure of Source Rules C. Income from Immovable Property D. Business Income E. Dividends, Interest, and Royalties F. Capital Gains G. Employment, Services, and Pension Income 1. Employment Income 2. Fringe Benefits Tax 3. Services Income 4. Pension Income H. Other Income VI. Taxation of Residents A. Rate Scale and Personal Allowances B. Expatriates 1. Rate Scale 2. Fringe Benefits 3. Foreign-Source Income 4. Pensions and Social Security C. Relief from Double Taxation D. Capital Flight E. Change of Residence for Tax Reasons VII. Taxation of Nonresidents A. Income from Immovable Property B. Business Income C. Dividends, Interest, and Royalties D. Capital Gains E. Employment, Services, and Pension Income F. Company and Shareholder Taxation 1. Integration Systems 2. Reduction of Dividend Withholding Tax on Direct Investment 3. Branch Profits Tax 4. Branches and Subsidiaries in Transition Countries G. International Tax Avoidance and Evasion 1. Transfer Pricing 2. Thin Capitalization 3. Modern Financial Instruments135 4. Payments to Tax Havens 5. Double-Dipping 6. Treaty Shopping 7. Combinations of Tax Avoidance Techniques 8. Nonresident Portfolio Investors 9. Resident Investors VIII. Tax Treaty Issues Not Covered in Domestic Law A. Nondiscrimination B. Exchange of Information and Assistance in Collection C. Mutual Agreement Procedure IX. International Tax Priorities for Developing and Transition Countries 19. Taxation of Legal Persons and their Owners I. Introduction A. In General B. Relationship Between Enterprise Income and Investor Income II. Enterprise Income Taxation as a Withholding Tax on Investors III. Separate Taxation of Business Enterprises and of Distributions to Investors A. Tax on Economic Rents B. Subsidy Recapture C. Increased Vertical Equity D. Retention of Existing Double Taxation IV. Problems with Retaining Double Taxation of Business Income A. Aggravation of Tax Planning B. Profit Retention C. Debt and Equity V. Relationship Between Enterprise Income and Investor Income A. Single Schedular Tax on Income from Capital 1. Equity Interests 2. Debt and Lease Interests 3. Treatment of Preferred Income B. Multiple Taxes on Income from Capital Table 1. Interaction Systems Table 2. Degree of Reduction of Economic Double Taxation (Central Government 1. Separate (or Classical) System of Enterprise Tax Example 2. Dividend-Paid Deduction System Example Example Example 3. Split-Rate Systems 4. Dividend-Received Deduction (or Dividend-Exemption) System 5. Imputation Systems Example Example Example Example Example Example Example Example Example Example Example Example Example 6. Full Integration System Example Example Example VI. Distributions A. Typology of Distributions B. Tax Consequences of Distributions from Different Origins C. Implications of Different Tax Consequences for Distributions D. Simplified Systems E. Rules for Distinguishing Between Distributions of Income and Returns of Capital F. Complex Systems G. Examples H. Taxable Bonus Shares and Constructive Dividends VII. Defining Which Business Enterprises Should be Subject to Separate Corporate Tax VIII. Concluding Remarks 20. Taxation of Corporate Reorganizations I. Introduction II. Forms of Corporate Reorganization A. Merger B. Consolidation C. Corporate Divisions D. Asset Acquisition E. Share Acquisition F. Change in Seat or Form G. Recapitalization H. Bankruptcy Reorganizations III. Taxable Reorganizations A. Tax Position of the Transferor Company Example B. Tax Position of the Shareholders of the Transferor 1. Taxability of Shareholders 2. Calculation of Taxable Gain 3. Cost Base of Assets Received in Exchange for Shares C. Tax Position of the Transferee 1. Cost Base of the Transferred Assets 2. Transfer of Tax Benefits and Preferential Tax Regimes 3. Transfer of Tax Loss Carryovers 4. Transfer of Rights and Obligations in Litigation 5. Methods of Accounting D. Reorganizations Without Transfer of Assets or Shares 1. Change of Corporate Seat or Form 2. Recapitalizations IV. Tax-Free Reorganizations A. Introduction B. Conditions for a Tax-Free Reorganization 1. Conditions Set in Tax Law or in Company Law 2. Degree of Continuity 3. Transfer of Liabilities 4. Nonvoting Shares 5. Step Transaction Doctrine 6. Corporate Divisions 7. Elective Taxable Treatment 8. Requiring Approval C. Tax Consequences of Tax-Free Reorganizations 1. Tax Position of the Transferor Company Examples 2. Tax Position of Transferor Shareholders 3. Tax Position of the Transferee Company Example V. Taxes Other Than Income Tax 21. Fiscal Transparency I. Introduction II. Partnerships A. Introduction 1. Legal Nature of Partnerships 2. Partnerships as Taxable Entities 3. Defining Which Entities Are Subject to Which Regime 4. Partnerships as Flow-Through Entities 5. Tax Obligations Imposed on Partnerships B. Allocating Partnership Income to Partners 1. Allocation According to Partnership Agreement 2. Deductions 3. Losses 4. Taxable Year 5. Antiavoidance Rules C. Flow Through of the Character of Partnership Income 1. General 2. Capital Gains 3. Foreign-Source Income D. Disposals of Partnership Interests E. Formation or Liquidation of a Partnership F. Partnership Distributions G. Adjustment to Cost Base of Partnership Assets H. Territorial Application of Partnership Rules I. Conclusion III. Trusts A. Introduction B. Flow Through of Trust Income to Beneficiaries 1. General 2. Method of Taxing Beneficiaries 3. Allocating Trust Income to Beneficiaries 4. Flow-Through Character of Trust Income C. Taxation of the Trust 1. Liability of the Trustee 2. Income on Which Tax Is Payable 3. Rate of Tax D. Antiavoidance Legislation 1. Grantor Trusts 2. Multiple Trusts E. Disposals of Trust Property and Trust Interests 1. Trust Property 2. Trust Interests F. International Aspects of the Taxation of Trusts 1. General 2. Residence of Trusts 3. Foreign-Source Income 4. Nonresident Beneficiaries 5. Nonresident Trusts IV. Other Flow-Through Entities A. Automatic Flow-Through Treatment 1. Joint Ventures 2. Other Entities Given Flow-Through Treatment B. Elective Flow-Through Treatment V. Conclusion 22. Taxation of Investment Funds I. Introduction II. Role of Investment Funds A. Regulation of Investment Funds B. Goals of Tax Regime for Investment Funds 1. Encourage Development of Investment Funds 2. Market Neutrality 3. Administration and Compliance Considerations 4. Revenue Concerns III. Taxing Investment Funds in the Context of the Basic Tax Structure A. Basic Tax Structure B. Types of Investors C. Types of Income 1. Possible Types of Income 2. Categorization for Tax Purposes 3. Tax Items That May Require Separate Treatment IV. Different Prototypes A. Tax-Advantaged Prototypes B. Pass-Through Prototypes C. Surrogate Prototypes D. Distribution-Deduction Prototype V. Conclusion 23. Income Tax Incentives for Investment I. Introduction II. Relationship Between Taxation and Investment A. Tax and Nontax Factors Affecting Investment B. Lack of Success of Investment Tax Incentives III. General Tax Incentives A. Types of General Tax Incentives 1. Tax Holidays 2. Investment Allowances and Tax Credits 3. Timing Differences 4. Tax Rate Reductions 5. Administrative Discretion B. Comparison of Incentives 1. Beneficiaries 2. Profile of Revenue Impact 3. Administration and Tax Avoidance C. Minimizing Problems of Incentives 1. Investment Allowances and Credits 2. Tax Holidays 3. Low Tax Rates IV. Special Purpose Tax Incentives A. Regional Development B. Employment Creation C. Technology Transfer D. Export Promotion E. Free Trade or Export Processing Zones V. International Aspects of Tax Incentives A. Incentives with an International Focus 1. Incentives for Foreign Investors 2. Relief from Cross-Border Withholding Taxes B. Tax Incentives and Relief from Double Taxation 1. Relief from Double Taxation in the Residence Country 2. Tax Treaties and Tax Sparing 3. International Double Nontaxation 4. Tax Treaty Network C. Tax Competition Appendix. Tax Holidays and Loss Carryforwards